TCG VENTURES LIMITED
KIRK HOUSE, P.O. BOX 1100-G, GRAND CAYMAN, B.W.I.
TELEPHONE (345) 949-7212 TELEFAX (345) 949-0993 TELEX CP4226
8 May 1998
VIA FAX TO : «Fax»
Total Number of Pages : 5 (including this page)
«ContactName»
«Address1»
«Address2»
«CityStateZip»
Investment Vehicle: «Vehicle»
Commitment: US$«Commitment»
Dear «Salutation»,
We are pleased to notify you that Carlyle Venture Partners, L.P. and its investing affiliates (the “Fund”) will be investing in SKYCACHE, Inc. (“SKYCACHE”). The Fund, along with certain parallel partnerships, is contributing $6 million toward an equity investment in SKYCACHE. C/S Venture Investors will be co-investing $864,553 in Net2000. A detailed description of this transaction is provided with this letter.
Pursuant to Section 3.01 of the Agreement of Limited Partnership dated 30 September 1997 (the “Agreement”), TCG Ventures Limited, as General Partner, is making a capital call for the investment in SKYCACHE, Inc.
Funding Obligation
The following summarizes your funding obligation for this capital call:
Investment in SKYCACHE, Inc.US$«SkyCache»
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Total Funding ObligationUS$«TotReqdEquity»
Your total funding obligation of US$«TotReqdEquity»(please include any wiring fees with your payment) must be sent to us according to the following wiring instructions no later than 22 May 1998:
Chase Manhattan Bank N.A.
New York
ABA 021000021
For account Bank Julius Baer & Co. Ltd.
New York account number 544 777 037
For onward credit
C/S Venture Investors, L.P.
Account number 425-405
Ref: «Vehicle»
Additional Information
The attachment to this letter contains an overview of SKYCACHE, Inc. If you have any questions regarding this investment please contact Brian Hayhurst at (202) 347-2626. If you have any questions regarding this capital call noticeplease contact Patty Watson at (202) 626-1277 or John Harris at (202) 626-1242 or Megan McGovern at (202) 626-1275.
Thank you for the faith you have placed in us and we appreciate your prompt attention in addressing this notice.
Yours faithfully,
TCG Ventures Limited
TCG Ventures Limited
General Partner
SKYCACHE, INC.
SKYCACHE, INC.
On March 25, 1998 Carlyle Venture Partners (“Carlyle”) and SkyCache, Inc. (“SkyCache” or the “Company”) executed a term sheet pursuant to which Carlyle proposes to invest approximately $6 million in the Company. Carlyle’s investment in the Company will represent a 41.1% ownership of SkyCache. The proposed transaction is expected to close on or about May 22, 1998.
Overview
Internet usage has and continues to grow at rates that have increased network loading and overwhelmed the current networking capacity. This growth is forcing a re-engineering of how the Internet operates. The Internet relies upon leased-line technologies for its many backbones. With the advent of the World Wide Web, the lack of efficiency in carrying one-to-many traffic has become glaringly apparent. SkyCache is focused on the addition of web caching to the network architectures of Internet Service Providers (“ISPs”) and Enterprises. The implementation of caching places copies of broadcast data at points closer to end users and increases the efficiency of available bandwidth. ISPs and Enterprises can therefore utilize caches to reduce bandwidth cost and to improve user performance. The market for caching products is expected to surpass $4 billion by the year 2002.
The Company
SkyCache, located in Laurel, Maryland, was founded in July 1997 by Doug Humphrey, previously the founder of DIGEX, a Tier 1 ISP. The Company’s initial product focuses on a new element of Internet infrastructure through the merging of two technologies: caching and one-way satellite broadcasting. Since the effectiveness of a cache is directly dependent not only on cache disk space (memory capacity) but also on the size of the subscriber/user base, the Company expects to further increase cache efficiency by aggregating users into a larger cache community and by delivering data via satellite transmission.
SkyCache will not sell web caches but will partner with existing web cache vendors. The SkyCache service will monitor data requests across ISPs and Enterprises within its installed base, determine significant commonly requested data, and transmit this common data to the caches of all these entities via one-way satellite communication. The SkyCache customer benefits from the commonality of requests not just from its own subscriber base but from the combined subscriber base of all of SkyCache’s customers. Bandwidth usage is incrementally reduced and user performance is enhanced by each user request served by an ISP’s or an Enterprise’s cache because the request and corresponding delivery of data does not require trips over the Internet. Once the SkyCache system is in place, additional product offerings will be implemented including, the ability to provide lower cost software distribution, synchronization of distributed data bases and enhanced audio and video content distribution.
Management believes the Company has the following key advantages:
- Potential to be first to market
- Knowledge of and credibility in the Internet marketplace
- Relatively low capital needs
- Patent pending technology
Product Testing
The effectiveness of a web cache is represented by what is commonly referred to as the cache “hit rate”. The hit rate is the number of subscriber requests served by the cache divided by the total number of subscriber requests. Based on current data, stand alone web cache hit rates for an average size Tier 2 ISP are between 20% and 30%. In order to ascertain the effectiveness of the SkyCache product, the Company is currently testing its service with eight beta customers. The beta group consists of ISPs of varying size, with a total estimated user population of approximately 800,000 individuals. These ISPs were considering implementing caches or in the implementation process when contacted by SkyCache. Beta test customers and locations are as follows:
APK – Cleveland OH / FCNet – Austin TXCrocker – Northampton MA / GoodNet – Phoenix AZ
DIGEX – Beltsville MD / Insync – Houston TX
Erols – Springfield VA / Transport – Portland OR
Preliminary beta test results indicate that hit rates have been improved on average by approximately 10 percentage points. These results are based on limited traffic at each beta customer being pointed at the SkyCache system, on the order of approximately 30,000 users in aggregate, and on a limited rule set defining a significant common event. The increase in the hit rate accomplished through the use of the SkyCache service is expected to improve as the traffic running through the service increases and as the rule set is refined. Management believes that hit rates may improve to as high as 70% over time as more ISPs and Enterprises implement the SkyCache service. Beta testing is estimated to be completed by the end of May, with product shipment taking place in late June or early July. The SkyCache service’s planned pricing is $2,500 per month, roughly the all-in cost of a single T1 line, making the economics very attractive for ISPs and Enterprises.
Investment Summary
Carlyle Venture Partners will invest $6,000,000 in the Company to acquire Series A Convertible Preferred Stock, convertible into 6,676,677 shares of common stock based on a $0.90 per share conversion price. The investment represents a 41.1% ownership of SkyCache. Current shareholders principally consist of Doug Humphrey, founder and CEO, members of management and certain outside individuals.
The definitive documentation for the investment will include standard terms and conditions, protective provisions, representations and warranties, covenants, antidilution protections and preemptive rights. As a condition of closing, Carlyle has required the identification and employment of a Chief Operating Officer to direct the day-to-day operations of the Company. Carlyle will appoint two members of the Company’s five-member Board of Directors. Other members of the Board will include two individuals elected by the Common shareholders and a mutually agreed upon independent director.
Key Investment Considerations
Leadership Position in a New Market
SkyCache plans to become the market leader in integrating current caching technology and satellite data transmission, reducing bandwidth requirements for its customers in the Internet industry. Based upon remarks by various industry leaders and in the press, Internet bandwidth is growing at the rate of 1000% every year. SkyCache’s service will enhance bandwidth utilization, potentially resulting in significant infrastructure savings for the Company’s customers.
Infrastructure Investment
The SkyCache service represents an additional value-added component of the Internet infrastructure, one that is a wholesale service targeted at high end users such as ISPs or large corporations. In addition to the SkyCache service, the Company envisions several other services based on the same technology that will be able to capitalize on the SkyCache installed user base. This allows the Company to appeal to a broad spectrum of customers including Internet Service Providers, Software Vendors, Video and Audio Streaming Services, and large corporate users.
Visible and Respected Leadership
Douglas E. Humphrey, President and CEO, is a well-known and respected leader in the Internet world. His last company, DIGEX, grew to become one of the ten largest ISPs in the United States before being acquired by Intermedia Communications for approximately $150 million. In his over 20-year involvement with the Internet, Mr. Humphrey has built unique relationships with individuals and institutions at the forefront of the growth of the Internet. He is well known for his vision in integrating and utilizing technologies.
Low Capital Requirements
Internet infrastructure has proven to be a capital-intensive growth industry. This is due to the geometric growth of data circuits in relation to data moved and user growth. This is a direct result of the one-to-one communications Internet model. The Company relies upon a broadcast model that will initially require one satellite uplink and one satellite transponder to achieve continental US coverage. As SkyCache traffic volume increases, the Company may need an additional transponder and/or uplink to handle the increased capacity. The Company expects to have the same infrastructure needs in Europe. This significantly reduces infrastructure requirements for SkyCache's customers.
Key Identified Risk Factors
- Limited History of Operations; Operating Losses
SkyCache has been in operation for approximately six months and has no revenues. SkyCache has experienced significant operating losses during this period. In addition,SkyCache expects that its operating expenses will continue to increase as SkyCacheexpands and, in particular, that sales and support expenses will increase significantly the near term as SkyCache develops and promotes its services more aggressively. There can be no assurance that sales of SkyCache's new services will achieve or sustain profitability on a quarterly or annual basis in the future.
- Key Employees
SkyCache's success depends to a significant degree upon the continued contributions of its principal management, sales and technical personnel, and upon its ability to attract and retain highly qualified personnel. Loss of essential employees, particularly Douglas E. Humphrey, or the inability to hire or retain qualified personnel could have an adverse effect on the viability of the Company, the development of products and services and quality of SkyCache's customer and technical services. These risks may additionally affect SkyCache's business, financial condition and results of operations.
- Competition
The Internet service industry includes many domestic companies, many of which have financial, technical, marketing, sales and other resources substantially greater than those of SkyCache.SkyCache also faces actual, potential and perceived competition from joint ventures and start-up companies with potential greater resources that may actively develop and market similar technical services. There can be no assurance that SkyCache's competition will not devote their significantly greater financial, technical, marketing and other resources to market aggressively competitive systems. In addition, SkyCache is likely to face competition in the future from companies that develop technology comparable or superior to SkyCache's technology and offer it to potential customers. Any of these competitive developments could have a material adverse effect on the Company.
- Lack of Market Acceptance
SkyCache’sinitial technology and service is currently in beta testing and as such the Company has not sold its service to any customers. There can be no assurance of market acceptance of these services. Failure of SkyCache to gain market acceptance for its services would have a significant and material adverse impact on its success.
Failure of Pending Patent Application
SkyCache has applied for service patent protection to cover its core technology. Although the issuance of a patent would significantly enhance SkyCache's ability to protect its technology and to restrict entrance to the Company's target markets, there can be no assurance that this patent will be granted. Once the Company is operational, there are other organizations with significant resources that will want to copy the Company's operations and its technological approach. Without patent protection, any competitor who is willing to expend significant resources may be able to compete effectively.
Summary Financial Information
The following Base Case projections were developed assuming revenue from only the SkyCache service. Management believes incremental revenues can be achieved by the sale of add-on products that are currently in development. The Base Case projections assume a 20% market penetration by the year 2002. The chart below summarizes the Base Case projections:
Investment Returns
Carlyle’s investment models predict IRRs in excess of 30% using the Base Case projections and conservative exit multiples of projected EBITDA and Net Income.
The Carlyle Group1May 1998